Passing money to children is an admirable goal that many parents have. However, there are some important factors to consider when deciding how to leave them the money so that they are set up for success.
A few years ago I met with a young woman who had just had her first son. I asked what brought her in to get her estate planning in place, assuming she’d say guardianship, but for her, that wasn’t it. She said, “I’m here because I never want to burden my son with money.”
I was thinking, “That sounds like a great problem to have!”
But in reality, it wasn’t. She told me that when she was eighteen years old, she received a very large inheritance, outright and without any restrictions. She was extremely bright, but instead of going to college as she had planned and doing all of the things most of us do in our twenties to build our futures, she ended up traveling and attracting the wrong people. It all came to halt when she found out she was expecting a child. By the time she came in to see me, all of the money was gone. She was starting over from scratch.
She taught me an important lesson: Passing money to your children at the wrong time (too young), and in the wrong way (without restrictions) creates a burden rather than a blessing.
I know you would never want your children to experience the pain and heartache our client did because of sudden wealth. The good news is that you can keep this from happening through careful estate planning and by passing money through a trust that is properly structured and managed. A trust allows you to create the terms for how you want to provide for your children and who you want to manage the money on their behalf.
There are three popular types of beneficiary trusts that you will likely want to use: common trusts, stated age trusts, and lifetime asset protection trusts.
If you have more than one child and they are all under eighteen, it makes a lot of sense to keep your money for them all together to be used for their health, education, maintenance, and support. This type of structure, which the legal world calls a common trust, allows the adult in charge of the money to draw from one shared pot of money. It mirrors what we are doing now for our children while we are alive.
For example, my daughter was recently injured and needed a few stitches in her head (we never did get a straight story from her brothers on how this happened). The hospital bill was very expensive. Her needs that month cost us much more than our other children’s needs because of her injury. Thus, we financially benefited our daughter more than our sons that month. This is what happens when you have a common trust. While all the children’s needs are met, the amount of money used on each child may be unequal.
At some point, after the kids are raised and become more independent, the common trust should end. You can decide the appropriate age for that to happen, at which point the remaining money will be divided up and transferred into separate trusts for each child, which we’ll look at below. We usually recommend the common trust terminate when the youngest turns eighteen, or, if the family is college-minded, then when the youngest turns twenty-three or graduates from college, whichever occurs first.
After the common trust terminates, the remaining assets can be divided into separate stated age trusts for each of your children. While the assets are in separate trusts, your trustee will use the assets for your children’s benefit. But when each child reaches certain ages or milestones, you can instruct the trustee to distribute all or a portion of the trust assets to your child outright without restrictions. You can do this all in one lump sum or you can distribute a percentage of the trust assets at stated ages (e.g., at age twenty-five the child gets 25% of the trust assets, at age thirty the child gets 50% of the trust assets, and at age thirty-five the child gets the remaining trust assets).
My clients often ask, what is a good age for my children to get full access to their money? Because many of their children are so young, it is difficult for them to know how their child will be as an adult. Some things to consider are:
As you can see, I am not a big fan of people getting money in their twenties. Clients usually ask, what about a wedding, or starting a business, or a home? You can structure your trust to allow the adult in charge of your child’s money to use trust money to pay for these important things and anything else you want; it just means that the adult gets to use discretion on what amount is appropriate for these purposes, rather than giving your child free reign.
Once your child hits the age you’ve chosen for them to receive their money, the money is fully theirs, outright and clear. This means they can spend it, lose it, invest it, use it on other people, or give it away however they want. The assets are also subject to creditors, predators, and divorce.
The lifetime asset protection trust allows you to provide for your child’s health, education, maintenance, support, and anything else you allow, but, unlike the stated age trust, the money stays protected in the trust for your child’s lifetime. The power of the lifetime asset protection trust is that the money is always available for your child’s benefit, but it is protected from improper or wasteful spending and from the outside world (e.g., creditors, predators, and divorce). Given how prevalent divorce and lawsuits are in society today, there is a good chance that at least one of your children and their assets will be subject to third-party threats. A lifetime asset protection trust is one of the few options available to protect their inheritance against the outside world. This is the type of trust I have chosen for my own children.
There are two ways to set up a lifetime asset protection trust for your child.
One option is to make another adult in charge of the money for your child’s entire lifetime, so while the child benefits from the money, they never actually control it. Some clients don’t like the idea because they feel it is too controlling. Other clients, who already know that their child will never become responsible enough to manage their own money, like this arrangement.
The other option is to set the trust up so your child will always benefit from the trust, but at some point will actually get to control it as well. Many people find this arrangement ideal because it provides their child both freedom and protections.
I also encourage my clients to create lifetime trust distribution guidelines, which provide further guidance and instruction to your trustee on how you would like your assets to be used for your child. You can also create incentives for pursuing certain business, career, educational, family, or philanthropic endeavors, or anything else you would like to encourage your child to pursue or explore. The idea is to provide the same guidance, support, and encouragement to your child that you would if you were still alive.
The best trust for your child is the one that sets your child up for success. I encourage you to talk with an attorney who has a lot of experience in this area who can guide you into making the best decision for your particular child.
We know how overwhelming it is to prepare for and navigate difficult life events. Schedule a planning session and together we can determine the best way to set up your estate plan in order to make sure you are passing money to your children in the way that will benefit them the most.